Why corporate reputation matters

Even though the importance of reputation management is irrefutable, experts say that reputation per se is not a controllable asset, except for the elements that compose it. Therefore, over and above understanding the concepts and relevance for the business, it is also important to understand its manageable aspects in which corporate communication plays an essential part.

The following statement expertly summarizes the importance of nurturing good corporate reputation:

“A positive reputation is arguably the most valuable intangible asset that a firm can possess. Firms with favorable reputations are more attractive to investors, customers, suppliers, exchange partners and employees; this attractiveness yields price, cost, and selection advantages, and it often persists over time” (Reuber, R. and Fischer, Eileen, 2007:54, Rotman Magazine)    

This statement stood out for two reasons: “arguably the most valuable intangible asset”, reinforcing the general idea which many authors struggle with – the intangible side of reputation – and “attractiveness”, the most tangible value of it.

Regarding the first observation, the correlation between reputation and profitability still remains scientifically unproven in the literature. However, the value of good reputation for business remains uncontestable.  According to Professor van Riel, “reputation ultimately increases the firm’s financial performance, in view of the fact that it decreases costs” by acting as an insurance police for future crises for example, so if the value of reputation can’t be quantified in financial terms, it can be at least perceived in business reality.

According to Bernstein (1986) cited in Fombrun and van Riel (2007:48) “reputation is a representation in the mind. It affects attitudes, which in turn affect behavior. No company can afford to ignore reputation”. The fact is that, tangible or not, the impact of a good or a bad reputation in business can’t be disregarded.

That leads us to the second observation, the vast “attraction effect” generated by a good reputation among multiple stakeholders groups. “A positive reputation works like a magnet. It strengthens the attractiveness of an organization, simplifying the realization of a broad range of activities. From research literature, we know that companies with positive reputation can more easily attract and retain employees and can ask a higher price for its products”. (Fombrun and van Riel, 2007:47).

There follows a more detailed list regarding the operational values of a good reputation for  business and its attractiveness effect as defined by Grahame Dowling (2001:12):

1.       It adds extra psychological value to the products

2.       It helps reduce the risk customers perceive when buying products or services

3.       It helps customers choose between products and services

4.       It increases employee job satisfaction

5.       It provides access to better quality employees when recruiting

6.       It increases advertising and sales-force effectiveness

7.       It supports new products introductions

8.       It acts as a powerful signal to your competitors

9.       It provides access to the best professional service providers

10.   It provides a second chance in the event of a crisis

11.   It helps raise capital on the equity market

12.   It enhances bargaining power in trade channels

According to the Reputation Institute “highly reputable companies create the highest level of support and the general public is five times more likely to support the most reputable companies”. This is especially important in case of a crisis, where having the benefit of the doubt can be the subtle line between survival and total failure. Strong reputations are stable even in crisis situations, for example, “empirical studies show that even when confronted with negative information, observers resist changing their reputational assessments” (Warlick, 1992 cited in Fombrun and van Riel (2007:55).

If still there is any doubt regarding the advantages of investing in a good reputation, there is no doubt that bad reputations can damage the business. That’s because the reputation is constructed based on the companies’ previous performance and actions, and “acts as a signal that summarizes its past behavior which can be used to forecast future actions” (G.R. Dowling, California Management Review, 2004:26).

In sending these signs of uncertainty to the broad public, it creates a chain reaction that negatively affects the business. Therefore, we can easily deduce that “a poor reputation can endanger a corporation’s health:

1.       Many CEOs say that share market analysts do not like their company and undervalue its share price

2.       Journalists seem to pay particular attention to companies with poor reputations, and even when these companies do something good, the journalists may remind their audience that this company has a bad history

3.       Customers seem more concerned and price sensitive about products and services from less well-respected companies

4.       Poor (external) reputations tend to “feed” poor employee morale”.

Grahame Dowling (2001:13)

The opposing effects caused by bad and good reputations impact the company’s health in many ways and among different groups of stakeholders, causing attraction or avoidance in these groups.  That’s why companies should care about reputation management, “leaders who systematically measure, value and manage their companies’ reputation have a better chance of surviving the risky, noisy and contested environments in which 21st Century companies increasingly operate.” (Fombrun and van Riel, Critical Eye, 2004:71)

The best way to manage corporate reputations is to take the lead and consider it as a strategic factor of success, which will help the company in the competitive market, reinforcing its competitive advantages and facilitating relationship building with key stakeholders.

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4 Responses to Why corporate reputation matters

  1. Ray Atkinson, ABC, APR says:

    Very insightful post. I think it’s interesting that many CEOs don’t recognize the value of corporate reputation, but in their companies’ 10-K filings they assign monetary value to “goodwill,” which is essentially the value a brand carries. Goodwill is calculated into the price of corporate acquisitions based on the intangible value of the brand, and often has to be written off after a few years if it is not realized in actual dollar value to the bottom line.

  2. Interesting read and a great reminder that brand is a virtual cycle – namely good reputation begets good employees who deliver a better experience or act in the appropriate way when crisis strikes. When working at a multi-billion dollar manufacturer, we looked at the impact a sustainable reputation had on the overall business or community reputation and it was very similar to what you have detailed above. This is great insight to furthering the way all divisions within a business operate or should operate. The greatest challenge is how those companies who have a bad reputation turn it around and improve themselves so that the perception becomes positive…

  3. Pingback: Candidly, how honest are your communications? « horizoncommunications

  4. Corporate reputation is important to achieve your goals. Your positive reputation is key to success in the business world .Boosting your good reputation typically depends on many professional and character traits.It’s easy to manage your reputation on the web. A good agency will help you achieve the wide range of tasks. Find some good options that will help you on your reputation problems.

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